5 Back-to-College Lessons on Building Credit

Hey, college students: Summer is almost over, and before you’re busy cramming for exams, you should spend a few minutes to studying up on your credit. You might be just getting started with your first card, but review these five tips and you’ll reap the benefits well after graduation day.

1. Five major factors affect your credit scores

Continue Reading Below

Several companies produce credit scores, and most consider five factors: your payment history, credit utilization, the length of your credit history, the types of credit accounts you hold and any new credit accounts you’ve opened. No matter how long you’ve had credit, you can use each factor to get yours in good shape.

Payment history: Paying all of your bills on time is the most important thing you can do for your credit, even if you’re only able to make the minimum payment. If you accidentally miss a due date, send the money as soon as you can. You might incur a late fee, but if you made the payment within 30 days, it won’t be reported to the credit bureaus.

Credit utilization: Utilization is the percentage of your available credit you’re using. Keep it low, ideally below 30%. So if you have a credit card with a $5,000 limit, try to keep your balance below $1,500. Your issuer might report your balance in the middle of the month, so aim to have less than 30% utilization at all times, not just after you make your monthly payment.

Length of credit history: The older the average age of your accounts, the better, so don’t close your first credit card account when you open a second. Instead, use the first card occasionally to keep it active.

Types of accounts: It helps to have a mix of credit accounts — credit cards, student loans, an auto loan and so on. But if you have only a credit card and don’t need another account, don’t open it. This factor is less important than the first three.

Advertisement

New credit: Apply for new credit cards sparingly. Each new account shortens the average age of your accounts, and each new application results in a hard inquiry on your credit report, which can ding your credit score. The shorter your credit history, the more this can hurt your credit, so it’s especially important to limit your applications when you’re just starting out.

2. Bad credit hits more than just your wallet

Having bad credit can increase the interest rates you pay and even your car insurance premiums. But that’s not its only impact.

Landlords and wireless providers commonly check applicants’ credit to find out whether they’re likely to pay on time, and having bad scores can limit your options for apartments and cell phone service. If you’re on your parents’ cellular plan and live on campus, you might think this doesn’t apply to you — but it will soon.

Employers may also run credit checks, and having bad credit could keep you from getting a job in some states.

3. Try not to carry a balance

A NerdWallet survey found that 41% of Americans think carrying a small balance on a credit card from month to month will improve their credit. But you won’t get a boost from maintaining a balance, and it will definitely cost you in interest charges. Use your credit cards enough to keep the accounts active, but pay each balance in full every month to avoid interest.

4. Check your three credit reports annually

Three major credit bureaus produce credit reports: Experian, Equifax and TransUnion. You’re entitled to one free copy of your report from each bureau every year via AnnualCreditReport.com. Review each for errors to keep your credit on track.

You won’t find your credit scores on any of the reports. You can find yours for free online at some websites, including NerdWallet, or perhaps through your credit card issuer. If yours doesn’t provide it, you can buy it directly from Equifax, Experian or TransUnion. Scores may vary slightly depending on the scoring model used, but they should all be in the same ballpark.

5. Build credit with a secured credit card

To get a secured card, you put down a cash deposit, usually equal to your credit limit. Banks can seize this if you don’t make your payments, so they’ll issue these cards even to people who have poor credit or lack a credit history. You’ll get the deposit back when you close your account in good standing or upgrade your account to a regular, unsecured card.

Secured cards make up less than 1% of the credit card market, but they’re great for building credit. A secured card works just like an unsecured card, with the exception of the deposit. You use it to make purchases, then pay them off, and your issuer reports your payment activity to the credit bureaus.